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By Steve RothwellASSOCIATED PRESS • Wednesday January 2, 2013 5:23 AM

NEW YORK — Many analysts say that the outlook for stocks this year is good, as a recovering
housing market and an improving jobs outlook help the economy maintain a slow but steady
recovery.

An advance of 10 percent in 2013 would send the Standard & Poor’s 500 index just beyond its
record close of 1,565, reached in October 2007.

A midyear rally in 2012 pushed stocks to their highest in more than four years. The S&P 500
finished the year with a 13.4 percent gain; the Dow Jones industrial average ended up 7.3
percent.Those advances came despite uncertainty about the outcome of the presidential election and
bouts of turmoil in Europe, where policymakers finally appear to be getting a grip on their debt
crisis.

“As you remove little bits of uncertainty, investors can then once again return to focusing on
the fundamentals,” said Joseph Tanious, a global-market strategist at J.P. Morgan Funds. “Corporate
America is actually doing quite well.”

Although earnings growth of companies in the S&P 500 dropped to as low as 0.8 percent in the
summer, analysts predict that it will rebound this year and average 9.5 percent, according to data
from S&P Capital IQ. Also, companies have been hoarding cash. The amount of cash and cash
equivalents being held by companies in the S&P 500 climbed to a record $1 trillion at the end
of September, 65 percent more than five years ago, according to S&P Dow Jones Indices.

Assuming that lawmakers in Washington reached a budget deal in a reasonable amount of time,
investors will be more comfortable owning stocks in 2013, allowing valuations to rise, Tanious
said.

Stocks in the S&P 500 index are trading at a price-to-earnings multiple of about 13.5,
compared with the average of 17.9 since 1988, according to S&P Capital IQ data. A
lower-than-average ratio suggests that stocks are cheap.

The stock market also probably will face less drag from the European debt crisis this year, said
Steven Bulko, the chief investment officer at Lombard Odier Investment Managers. Although
policymakers in Europe have yet to find a comprehensive solution to the region’s woes, they appear
to have a better handle on the problems than in the recent past.

“There is still some heavy lifting that needs to be done in Europe,” Bulko said. Now, however, “
we are dealing with much more manageable risk than we have had in the past few years.”

Next year also might see an increase in mergers and acquisitions as companies seek to make use
of the cash on their balance sheets, said Jarred Kessler, global head of equities at broker Cantor
Fitzgerald.

Although the number of merger and acquisitions deals has crept higher in the past four years,
the dollar value of the deals remains well short of the total reached five years ago. U.S.-focused
acquisitions totaled $964 billion through Thursday, according to data tracking firm Dealogic. That’s
down slightly from last year’s total of $1 trillion and about 40 percent lower than in 2007, when
deals worth $1.6 trillion were struck.

These deals are good for stock prices because the acquiring company typically pays a premium for
the one it’s buying.

In the bond market, 2012 saw interest rates drop as the long rally continued. Concerns about
swings in stock prices prompted investors to switch money from stocks to bonds. If investors decide
that the bond rally might be nearing an end, that flow of funds might be reversed, providing a
support for stocks.

“Equities are the best house in a bad neighborhood,” Cantor’s Kessler said. “Bonds are not
priced to euphoria, but they are definitely rich compared to equities right now.”

Not all investors are as sanguine about 2013.

The rally in stocks in 2012 had less to do with company earnings and the economy than with
monetary stimulus from the Federal Reserve and other central banks around the world, said David
Wright, a managing director and co-founder of Sierra Investment Management in Santa Monica,
Calif.

Federal Reserve Chairman Ben Bernanke announced on Sept. 13 that the central bank would add
another round to its bond-purchase program, known on Wall Street as “quantitative easing.” The Fed’s
goal is to lower borrowing costs and boost growth. Speculation that more stimulus was coming from
the Fed had pushed the S&P 500 index to 1,466, its highest close of the year, a day earlier.
The Dow’s 2012 peak was at 13,610 on Oct. 5.

“The Fed has done everything it can do and is probably pretty close to having used its last
bullet,” Wright said. “It’s been a good year for stocks, but we think that’s an artifact of
monetary stimulus.”

Wright predicted that 2012’s peaks in the Dow and the S&P 500 won’t be surpassed in 2013,
and stocks might even slump in the first quarter, as investors lower their earnings expectations.
The money manager also said that any budget plan, regardless of the details, would be negative for
stocks because it will involve higher taxes and lower government spending.

Gina Martin Adams, a Wells Fargo Securities market analyst, also said that companies will
struggle in the first half of the year as the economy flirts with recession. Export growth is
slowing, and policymakers are struggling to come up with a plan to reduce the budget deficit.

Wells Fargo recommends that investors put money into financial and utilities stocks because low
rates should help support steady earnings growth in early 2013. Wells Fargo also advises investors
to reduce their exposure to consumer discretionary stocks, which include hotels and restaurant
companies, because consumer spending probably will take a hit this year as taxes rise.